“Although our third quarter revenues increased by 5% over the previous year’s quarter, they did not meet our expectations, as several factors, including a disconnect between prescription demand and wholesaler shipments, influenced net sales of the NUCYNTA franchise and Gralise. Prescriptions for NUCYNTA ER grew 4% over the second quarter, while shipments to wholesalers were down 1%. Prescriptions for NUCYNTA and Gralise were equal to the second quarter, however, shipments were down 6% and 12%, respectively,” said Jim Schoeneck, President and CEO of Depomed. “In addition, we made adjustments to our reserve accounts, including managed care and PBM rebate submissions from prior quarters, which impacted our product net sales.”

Continued Mr. Schoeneck, “For the rest of 2016 and beyond, we are fully committed to continuing the successful relaunch of our Nucynta franchise and building prescription demand for our products. For the third quarter, NUCYNTA ER reached all time high monthly market share and total prescriptions, with year-over-year prescription growth of approximately 20%. In addition, the rest of our portfolio achieved revenues of $45 million, an increase of 13% year-over-year. Finally, Depomed’s recent NUCYNTA ANDA patent litigation win marked a major milestone for the company, giving us more than 9 years to continue to grow the NUCYNTA franchise, with exclusivity established until December 2025.”

Business and Financial Highlights

Third quarter 2016 revenues were $111 million, compared to $105 million for third quarter of 2015, an increase of 5%

Favorable District Court ruling in the company's patent litigation against all three filers of Abbreviated New Drug Applications (ANDAs) of the NUCYNTA franchise with expected market exclusivity until December 2025

Settlement agreement reached with Starboard Value LP including the addition of three independent directors, James P. Fogarty, Robert G. Savage and James L. Tyree, to Depomed’s Board of Directors

Introduction of a new aspartame-free formulation of CAMBIA® (diclofenac potassium for oral solution)

NUCYNTA Franchise Highlights

Third quarter 2016 net sales of $65 million

Net sales of $396 million since acquisition on April 2, 2015

NUCYNTA ER® reached record all-time monthly high prescription volume of over 30,000 in August, an increase of 20.4% over August 20151

NUCYNTA ER reached record all-time monthly high market share of 6.85% of branded long acting opioids and 1.99% of total long acting opioids in September1

Product Portfolio Highlights

Gralise® third quarter 2016 net sales were $21 million

Cambia® third quarter 2016 net sales were a record $9.1 million, an increase of 29% compared to $7 million in the same period last year. Cambia total branded market share reached an all-time high in August1

Lazanda® third quarter 2016 net sales were a record $8.2 million, an increase of 50% compared to $5.4 million in the same period last year. Lazanda total market share reached an all-time high in September1

1 Source: SHA IDV

REVENUES (GAAP BASIS)

(in thousands, unaudited)

Three Months Ended

Nine Months Ended

September 30,

September 30,

2016

2015

2016

2015

Product sales, net:

Nucynta products1

$

65,287

$

64,936

$

206,568

$

121,597

Gralise

20,640

21,116

63,451

59,317

Cambia

9,110

7,058

22,900

19,268

Lazanda

8,181

5,440

19,093

12,475

Zipsor

7,085

6,176

19,379

18,035

Total product sales, net

110,303

104,726

331,391

230,692

Royalties

221

130

595

872

Total revenues (GAAP Basis)

$

110,524

$

104,856

$

331,986

$

231,564

1 Nucynta acquisition completed April 2015

Updated 2016 Financial Outlook

Depomed is updating its 2016 financial guidance as follows:

Updated Guidance

Prior Guidance

Total Revenue

$455 to $465 million

$480 to $505 million

GAAP SG&A Expense

$204 to $208 million

Previously not given

GAAP R&D Expense

$33 to $36 million

Previously not given

Non-GAAP SG&A Expense

$183 to $187 million

$185 to $190 million

Non-GAAP R&D Expense

$32 to $35 million

$28 to $35 million

GAAP Net Loss

$43 to $49 million

Previously not given

Non-GAAP Adjusted Earnings

$79 to $85 million

$95 to $105 million

Non-GAAP Adjusted EBITDA

$152 to $160 million

$175 to $190 million

The Company is now providing GAAP net loss and GAAP expense guidance as the Company is now able to estimate its non-recurring costs for the remainder of 2016.

Non-GAAP Financial Measures

In this press release, Depomed includes information about non-GAAP adjusted earnings, non-GAAP adjusted earnings per share, non-GAAP adjusted EBITDA, and other non-GAAP financial measures, as useful operating metrics for the three month and six periods ended September 30, 2016 and 2015 and its full year 2016 financial outlook.

The Company believes that the presentation of these non-GAAP financial measures, when viewed with our results under GAAP and the accompanying reconciliations, provides relevant and useful supplementary information to analysts, investors, lenders, and our management in assessing the Company’s performance and liquidity. The Company uses these non-GAAP financial measures in connection with its own planning and forecasting purposes, and in part, in the determination of bonuses for executive officer and employees.

The Company uses non-GAAP adjusted earnings and non-GAAP adjusted earnings per share to evaluate its period-over-period operating performance because it provides supplementary information on the results of the primary operations of the Company that more consistently correlates with the Company’s underlying operating cash flows of the business by removing non-cash gains or losses and non-recurring cash gains or losses. This measure may also be useful to investors and analysts in evaluating the underlying operating performance of the business.

Non-GAAP adjusted earnings and non-GAAP adjusted earnings per share are not based on any standardized methodology prescribed by GAAP and represent GAAP net loss and GAAP net loss per share adjusted to exclude (1) amortization and non-cash adjustments related to product acquisitions, (2) non-cash stock-based compensation expense, (3) non-cash interest expense related to debt, (4) non-recurring costs associated with the Company's defense against the Horizon Pharma hostile takeover bid in 2015 and costs associated with the special meeting requests made by an activist investor in 2016, and by excluding (5) the non-cash portion of income tax benefit/expense related to the period.

The Company uses non-GAAP adjusted EBITDA to evaluate its period-over-period operating performance because it provides supplementary information on the results of the primary operations of the Company before investing and financing income and expense and taxes. This measure may be useful to lenders and other parties to evaluate our credit worthiness. This measure may also be useful to investors and analysts in evaluating the underlying operating performance of the business.

Non-GAAP adjusted EBITDA is not based on any standardized methodology prescribed by GAAP and represents GAAP net loss adjusted to exclude (1) amortization and non-cash adjustments related to product acquisitions, (2) non-cash stock-based compensation expense, (3) depreciation, (4) taxes, (5) non-recurring costs associated with the Company's defense against the Horizon Pharma hostile takeover bid in 2015 and costs associated with the special meeting requests made by an activist investor in 2016, (6) interest income and expense, and (7) non-recurring transaction costs associated with product acquisitions. Non-GAAP financial measures used by the Company may be calculated differently from, and therefore may not be comparable to, non-GAAP measures used by other companies.

These non-GAAP financial measures should be considered in addition to, and not a substitute for, or superior to, net loss or other financial measures calculated in accordance with GAAP.

Conference Call

Depomed will host a conference call today, Monday, November 7th, beginning at 4:30 p.m. EST (1:30 p.m. PST) to discuss its results. Participants can access the call by dialing (866) 643-3010 (United States) or (857) 270-6032 (International) referencing conference ID 11112362. The conference call will also be available via a live webcast under the Investor Relations section of Depomed's website at http://www.Depomed.com. Access the website 15 minutes prior to the start of the call to download and install any necessary audio software. An archived webcast replay will be available on the Company's website for three months.

About Depomed

Depomed is a leading specialty pharmaceutical company focused on enhancing the lives of the patients, families, physicians, providers and payors we serve through commercializing innovative products for pain and neurology related disorders. Depomed markets six medicines with areas of focus that include mild to severe acute pain, moderate to severe chronic pain, neuropathic pain, migraine and breakthrough cancer pain. Depomed is headquartered in Newark, California. To learn more about Depomed, visit www.depomed.com.

"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995. The statements that are not historical facts contained in this release are forward-looking statements that involve risks and uncertainties including, but not limited to, those related to the commercialization of NUCYNTA ER, NUCYNTA, Gralise, CAMBIA, Zipsor and Lazanda, Depomed's financial outlook for 2016 and expectations regarding financial results and potential business opportunities and other risks detailed in the company's Securities and Exchange Commission filings, including the company's most recent Annual Report on Form 10-K and most recent Quarterly Report on Form 10-Q. The inclusion of forward-looking statements should not be regarded as a representation that any of the company's plans or objectives will be achieved. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

CONSOLIDATED STATEMENTS OF OPERATIONS (GAAP BASIS)

(in thousands, except per share amounts)

Three Months Ended

Nine Months Ended

September 30,

September 30,

2016

2015

2016

2015

(unaudited)

(unaudited)

Revenues:

Product sales, net

$

110,303

$

104,726

$

331,391

$

230,692

Royalties

221

130

595

872

Total revenues

110,524

104,856

331,986

231,564

Costs and expenses:

Cost of sales

20,243

20,914

64,757

46,891

Research and development expense

10,412

4,629

23,477

11,201

Selling, general and administrative expense

51,574

49,065

156,036

141,015

Amortization of intangible assets

27,037

27,013

81,111

56,284

Total costs and expenses

109,266

101,621

325,381

255,391

Income (loss) from operations

1,258

3,235

6,605

(23,827

)

Other income

113

62

310

180

Loss on prepayment of senior notes

-

-

(5,777

)

-

Interest expense

(20,307

)

(22,634

)

(63,182

)

(50,733

)

Benefit from income taxes

6,042

7,552

17,692

29,310

Net loss

$

(12,894

)

$

(11,785

)

$

(44,352

)

$

(45,070

)

Basic and diluted net loss per share

$

(0.21

)

$

(0.20

)

$

(0.73

)

$

(0.75

)

Shares used in calculating basic and diluted net loss per share

61,422,015

60,320,369

61,163,059

59,960,507

CONSOLIDATED CONDENSED BALANCE SHEETS

(in thousands)

(unaudited)

September 30,

December 31,

2016

2015

Cash, cash equivalents and marketable securities

$

137,093

$

209,768

Accounts receivable

87,385

71,687

Inventories

11,258

10,494

Income taxes receivable

14,509

6,358

Property and equipment, net

16,065

14,794

Intangible assets, net

927,884

1,008,994

Deferred tax assets

42,344

22,995

Prepaid and other assets

13,148

12,159

Total assets

$

1,249,686

$

1,357,249

Accounts payable

18,471

12,805

Income tax payable

543

-

Interest payable

13,768

18,672

Accrued liabilities

53,363

62,931

Accrued rebates, returns and discounts

124,672

121,058

Senior notes

465,453

563,012

Convertible notes

248,735

237,313

Contingent consideration liability

14,949

14,971

Other liabilities

19,001

11,432

Shareholders’ equity

290,731

315,055

Total liabilities and shareholders’ equity

$

1,249,686

$

1,357,249

RECONCILIATION OF GAAP NET LOSS TO NON-GAAP ADJUSTED EARNINGS

(in thousands, except per share amounts)

Three Months Ended

Nine Months Ended

September 30,

September 30,

2016

2015

2016

2015

(unaudited)

(unaudited)

GAAP net loss

$

(12,894

)

$

(11,785

)

$

(44,352

)

$

(45,070

)

Non-cash interest expense on debt

4,460

4,051

13,861

11,456

Intangible amortization related to product acquisitions

27,037

27,013

81,111

56,284

Inventory step-up related to product acquisitions

-

786

16

5,988

Product sales benefit related to product acquisitions

-

-

-

10,466

Contingent consideration related to product acquisitions

686

(134

)

1,593

(2,029

)

Stock based compensation

4,364

3,631

12,602

9,697

Non-cash income tax adjustment

(4,739

)

(2,076

)

(19,200

)

(13,292

)

Other costs (1)

2,015

3,405

2,942

3,620

Non-GAAP adjusted earnings

$

20,929

$

24,891

$

48,573

$

37,120

Add interest expense of convertible debt, net of tax (2)

2,091

2,156

6,275

6,470

Numerator

$

23,020

$

27,047

$

54,848

$

43,590

Shares used in calculation (2)

81,940

81,830

81,370

81,110

Non-GAAP adjusted earnings per share (2)

$

0.28

$

0.33

$

0.67

$

0.54

(1) Other costs represents non-recurring costs associated with the special meeting requests of an activist investor and costs associated with the Company's defense of Horizon Pharma's hostile takeover attempt

(2) The Company uses the if-converted method to compute diluted earnings per share with respect to its convertible debt.

RECONCILIATION OF GAAP NET LOSS TO NON-GAAP ADJUSTED EBITDA

(in thousands)

Three Months Ended

Nine Months Ended

September 30,

September 30,

2016

2015

2016

2015

(unaudited)

(unaudited)

GAAP net loss

$

(12,894

)

$

(11,785

)

$

(44,352

)

$

(45,070

)

Intangible amortization related to product acquisitions

27,037

27,013

81,111

56,284

Inventory step-up related to product acquisitions

-

786

16

5,988

Product sales benefit related to product acquisitions

-

-

-

10,466

Contingent consideration related to product acquisitions

686

(134

)

1,593

(2,029

)

Stock based compensation

4,364

3,631

12,602

9,697

Interest and other income

(113

)

(62

)

(310

)

(180

)

Interest expense

19,666

22,027

67,001

49,036

Depreciation

646

682

1,908

1,730

Benefit from income taxes

(6,042

)

(7,552

)

(17,692

)

(29,310

)

Other costs (1)

2,015

3,405

2,942

3,620

Transaction costs

-

150

45

12,267

Non-GAAP adjusted EBITDA

$

35,365

$

38,161

$

104,864

$

72,499

(1) Other costs represents non-recurring costs associated with the special meeting requests of an activist investor and costs associated with the Company's defense of Horizon Pharma's hostile takeover attempt

consideration of ($209) and $(3,726) for the nine months ended in September 30, 2016 and 2015, respectively

(e) Amortization of intangible assets

(f) Non-cash acceleration of debt discount

(g) Non-cash interest expense of $13,861 and $11,456 contingent consideration of $1,802 and $1,697 for the nine months ended in September 30, 2016

and 2015, respectively

(h) Non-cash taxes

(i) Calculated by taking (a) plus (h) minus sum of (b) through (g)

RECONCILIATION OF GAAP NET LOSS TO NON-GAAP ADJUSTED EARNINGS

GUIDANCE FOR THE YEAR ENDING DECEMBER 31, 2016

(in millions)

GAAP net loss

$

(43) - (49)

Non-cash interest expense on debt

18 -19

Intangible amortization related to product acquisitions

108

Contingent consideration related to product acquisitions

2 - 3

Stock based compensation

16 - 18

Non-cash income tax adjustment

(21) - (25)

Other costs (1)

4 - 6

Non-GAAP adjusted earnings

$

79 - 85

RECONCILIATION OF GAAP NET LOSS TO NON-GAAP ADJUSTED EBITDA

GUIDANCE FOR THE YEAR ENDING DECEMBER 31, 2016

(in millions)

GAAP net loss

$

(43) - (49)

Intangible amortization related to product acquisitions

108

Contingent consideration related to product acquisitions

2 - 3

Stock based compensation

16 - 18

Interest expense

86 - 88

Depreciation

2 -3

Benefit from income taxes

(18) - (22)

Other costs (1)

4 - 6

Non-GAAP adjusted EBITDA

$

152 - 160

RECONCILIATION OF GAAP SG&A EXPENSE TO NON-GAAP SG&A EXPENSE

GUIDANCE FOR THE YEAR ENDING DECEMBER 31, 2016

(in millions)

GAAP SG&A expense

$

204 - 208

Stock based compensation

(15) - (17)

Other costs (1)

(4) - (6)

Non-GAAP SG&A expense

$

183 - 187

RECONCILIATION OF GAAP R&D EXPENSE TO NON-GAAP R&D EXPENSE

GUIDANCE FOR THE YEAR ENDING DECEMBER 31, 2016

(in millions)

GAAP R&D expense

$

33 - 36

Stock based compensation

(1

)

Non-GAAP R&D expense

$

32 - 35

(1) Other costs represents non-recurring costs associated with the special meeting requests of an activist investor and costs associated with the Company's defense of Horizon Pharma's hostile takeover attempt